Aspen’s new materials tax spurs questions

ASPEN ” Limelight Lodge owner Dale Paas is nervously awaiting what the financial implications will be on his new Aspen hotel once he has to pay a recent voter-approved tax on construction materials.

If Paas was to begin construction Jan. 2, when the 2.1-percent use tax goes into effect, Paas would pay roughly $573,000 in taxes. That’s based on the assessed valuation of the cost to build the hotel and 15 free market units, which total $55 million combined.

When the new law goes into effect, existing projects will be subject to the tax, but only on the remaining construction activity ” not the entire development.

Paas couldn’t estimate how much more he will pay in construction costs, but the tax is an unanticipated expense.

“It’s tight,” he said of the project’s financing.

City officials currently are hashing out details of how the use tax will be administered and how existing projects will pay.

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General contractors will be required to pay an estimated calculation of the tax before their projects begin in the form of a deposit.

But for existing projects like Paas’, city officials aren’t sure yet how to tax them except that they likely won’t collect the money all at once, or at the outset of implementing the system.

“I’m happy to hear you are easing into this,” Paas told city officials at a meeting held Thursday when more than a dozen builders and their representatives were on hand to learn more about the system. “It will be a little challenging, and we appreciate your benevolence.”

Paas won’t be the only builder who will feel the pinch in coming years.

There are about 400 current construction projects in the city, which are valued at more than $700 million, said city Finance Director Paul Menter. Whatever percentage is left to be completed on those projects will be subject to the tax.

Menter said $1.7 million in use tax revenue is budgeted for 2008. In future years, Menter expects the use tax to generate about $3 million in revenue annually.

“We’ve got some big-dollar contracts in this town,” he said.

The tax revenue will subsidize the operation, maintenance and capital replacement of the city’s free transit service, which includes nine bus shuttles. That transportation fund is expected to experience a multimillion-dollar shortfall in upcoming years because of increasing costs.

The use tax was passed in conjunction with a new .15 percent sales tax that will be effective Sept. 2, 2009 ” a day after the current .25 percent tax expires. That portion of the sales tax also will go toward transportation and pedestrian improvements throughout the city.

When contractors apply for building permits, computer software will automatically calculate the use tax fee based on the valuation of the project, which is set by the industry standard on what the cost is per square foot and whether it’s residential or commercial.

Contractors will be required to estimate how much the project is going to cost and what materials will be consumed. They will make a deposit with City Hall, which will retain the money in a liability account until the project is complete.

After a certification of occupancy is issued, a “true up” process will begin if either the city government or the contractor doesn’t agree with what was initially paid.

If city officials believe that not enough tax has been paid after the building has been inspected, they will ask the contractor to provide itemized receipts on all materials used. Contractors who believe they’ve paid too much can ask for an audit. They will receive a refund if it’s determined they paid excessively.

“We prefer to work on a trust basis with the contractors,” Menter said, adding most municipalities that have taxes on construction materials use the system the city of Aspen is proposing.

Typically in those cities, contractors have accurate estimates and the “true up” process isn’t necessary. There will be no interest or penalties put on developers who underestimate their construction costs.

The onus to be accurate in the estimation is a joint responsibility between the general contractor and the property owner. That means they will be responsible for subcontractors’ estimates and how honest they are in calculating the costs.

Projects that cost less than $100,000 are exempt from the tax and so are those that involve government construction. The first $100,000 will be knocked off a project that exceeds the threshold.

The tax will be administered on 50 percent of the total cost of the project, which is based on the assumption that half of it is spent on construction materials, and the other half goes to labor.

Menter said the standard throughout Colorado is government entities that have use taxes collect a deposit first and hold the money until a certification of occupancy is issued.

“It greatly simplifies the administering process for the city,” Menter said. “The deposit method is to make sure the number is as accurate as possible.”

He added that it has not yet been determined who will collect interest on the money while it sits in an account controlled by City Hall.

The City Council must pass an ordinance in order for the use tax to take effect. The first public hearing on the new law is scheduled for Dec. 3. A second public hearing, when the council is expected to adopt the ordinance, is scheduled for Dec. 10. The following week, a public meeting will be held to present the final ordinance and explain the administrative procedures to implement the tax.